Illinois budget battle leads Moody’s to downgrade several state universities

Republican Illinois Gov. Bruce Rauner, seen here in the Illinois State Capitol in December 2014, shortly before he took office. (AP Photo/Seth Perlman)

An epic budget battle in Illinois led Moody’s Investors Service to downgrade the credit rating of three of the state’s public universities late Wednesday, the latest setback for schools that have been starved of funding for eight months and now face possible accreditation challenges.

Northeastern Illinois University and Northern Illinois University had their credit ratings lowered to just above junk status, while Eastern Illinois University’s rating is now below investment grade. That means analysts consider revenue bonds issued on behalf of the school to be a credit risk for investors.

“The downgrade is driven by EIU’s increasing vulnerability to the ongoing state budget impasse given its thin liquidity, declining enrollment and high reliance on state funding,” Moody’s said in a statement. “Liquid reserves are expected to be exhausted by the end of the fiscal year.”

Moody’s has held a negative outlook on all eight Illinois universities it rates since the fall because of their diminishing cash flow. Analysts said there was no indication that Illinois would allow its public universities to borrow money during the budget impasse, despite the strain the ordeal has placed on their operations.

Universities in Illinois have not seen a dime from the state in eight months as the Democratic-controlled general assembly and Republican Governor Bruce Rauner have failed to agree on a budget. The governor has tied passage of the $36 billion budget to changes in collective bargaining rights for public employees and worker compensation, business-friendly moves he says will help turn around the state’s flagging economy. If the legislature refuses to sign on to his changes, Rauner wants lawmakers to let him make $3.5 billion in spending cuts in any way he chooses.

What’s happening in Illinois, while extreme, speaks to enduring state disinvestment in higher education. State support for public universities and colleges remains far below what it was before the 2008 recession, even as many legislatures restore funding. And there are still at least a dozen states, including Louisiana and Pennsylvania, imposing cuts, starving already cash-strapped schools of needed aid.

“While there is a broader trend in states that are seeing revenues come back of reinvesting, in the states where revenue is struggling or there are shortfalls, higher education is on the chopping block,” said Michael Mitchell, a policy analyst at the Center on Budget and Policy Priorities.

Although states have been rolling back support for higher education since the 1980s, prior economic recessions were typically followed by a sizable reinvestment in higher education. Not this time around.

“The rate of reinvestment compared to just how significant the decline was is underwhelming, when we look at and compare it to previous recessions,” Mitchell said. “A part of the issue is it’s taken state revenues much longer to get back to pre-recession levels than it did in other cycles.”

Louisiana’s four-year universities endured a whopping 47 percent decline in appropriations between 2010 and 2014, compared to a median of 9 percent at other public universities, according to Moody’s. The rating agency placed the eight public universities it rates in Louisiana on review for downgrade Tuesday because of looming state funding cuts.

Analysts said cuts imposed more than halfway through the fiscal year hamstring the schools’ ability to adjust expenses or raise tuition to make up for the loss. And the uncertainty of state funding for the following year, they said, could dissuade students from enrolling as the budget puts the availability of state scholarships at risk.

Smaller regional universities in Illinois are bearing the brunt of the state’s budget battle. Eastern Illinois has laid off nearly 200 civil service employees, while imposing up to 24 furlough days on faculty and staff through the end of June. Western Illinois University has alerted more than two dozen non-tenured faculty of possible layoffs and is considering cutting some of its programs in the fall.

Chicago State University declared a state of financial emergency earlier this month to make it easier to fire tenured faculty and eliminate academic programs. Officials at the historically black university have warned that the school might not be able to make payroll in coming months. Nearly a third of CSU’s funding, roughly $36 million a year, comes from the state.

“Morale at CSU is very low because there’s a lot of uncertainty,” said Darren Martin, a senior at CSU, who joined students from other colleges in protesting the budget impasse at the statehouse earlier this month. “People don’t know if the school is going to be closed. They don’t know if they’re going to graduate.”

Schools with significant reserves and endowments, such as the University of Illinois and Illinois State University, have been able to weather the stalemate, though they are looking for ways to reduce costs.

Illinois State University President Larry Dietz, who leads the state universities’ presidents and chancellors group, said his school, like many others, is not filling open positions.

“None of us had anticipated that we would be at the end of February with no budget,” Dietz said. “The frustration has been … the unpredictability of what kind of decision and when that decision is going to be made. It’s been disconcerting for our students, faculty and staff.”

Many schools are in the unsustainable position of covering the cost of state scholarships for needy students known as Monetary Award Program grants, a form of financial aid that is being held up by the budget impasse. While most schools were able to float students the money for the fall semester with the expectation of state reimbursement, many can no longer afford to cover the aid. And students are suffering.

“Many of those MAP students are having to drop out,” said James Applegate, executive director of the Illinois Board of Higher Education. “This is having a devastating impact on our most vulnerable students and our institutions.”

Lawmakers have introduced a series of unsuccessful stopgap measures to fund the grants and ease the overall financial pressure on the university system. Just last week, Rauner vetoed a bill that would have provided $721 million for community colleges and the state grant program while lawmakers hashed out the budget.

“It’s possible there will be enough votes to override the veto, but legislators are in the process of thinking of alternative measures that could get some higher ed funding out there,” said Eve Rips, Midwest director for Young Invincibles, an advocacy group for millennials. “The odds of a resolution before April are very low at this point.”

Catherine Kelly, a spokeswoman for the governor, said, “The only thing standing in the way of funding for Illinois universities is the Democratic majority who refuse to call bills that would truly fund higher education.”

She went on to say that if Democrats backed bills that give the governor greater authority over the budget, he could redirect funding to the universities and state grants. Rauner is backing a bipartisan bill that would provide schools emergency funding.

The depth of the the fiscal crisis prompted the Higher Learning Commission, which accredits Illinois’ public colleges and universities, to ask schools for plans detailing what would happen to students if the budget impasse forces them to close or suspend classes. Officials at the agency said all of the schools have submitted contingency plans, a rare request for an entire public university system.

Tenuous state support is placing added pressure on schools that are already contending with lower tuition revenue from a drop in enrollment, said Jennifer Delaney, an associate professor of higher education at the University of Illinois at Urbana-Champaign.

The student body at Northern Illinois has gone from 25,313 in 2006 to 20,611 in 2014. During the same time, Southern Illinois University Carbondale has witnessed enrollment slide from 21,003 to 17,989 students, according to the Illinois Board of Higher Education.

To offset the loss of state support, public universities across the country have raised tuition, shifting more of the cost of higher education onto students and parents. But Illinois passed a law in 2004 requiring 12 public colleges and universities to charge incoming resident freshmen a fixed tuition rate for four years. Even if schools increased tuition next year to make up some of the loss, it wouldn’t make much of a difference, Delaney said.

“We might see tuition increases, but if you’re an institution with declining enrollment, that gets to be a challenging decision to make,” Delaney said. “You don’t want enrollment to go down further, further restricting your tuition revenue stream.”

Dietz is worried that the budget uncertainty will wreak further havoc on enrollment as college-bound students bypass state schools because of the grant funding issues. He said Illinois has a history of losing its high school graduates to colleges in neighboring states, and the fiscal crisis could only make that trend worse.

And Applegate is concerned that other universities could use the budget crisis as a pretense for poaching top faculty.

Even if Illinois lawmakers can come to terms and pass a budget, universities still are likely to face funding cuts. The budget the Democrats sent to the governor called for a 6.5 percent cut in higher education spending, while Rauner proposed slashing state support by 31 percent.

The governor’s 2017 budget does call for additional funding for schools that can hit certain performance goals, though he still would like a 16 percent funding cut to four-year institutions while maintaining support for community colleges. The Higher Education Board is proposing that the state stabilize funding for the next three years, in exchange for commitments from all schools to improve graduation rates and other student outcomes.

“We’re trying to right the ship,” Applegate said. “But with no state appropriations, with no MAP dollars, many of our public universities, especially those who are heavily reliant on state dollars and recruit a lot of low-income students, are on the edge of the cliff.”

As of Tuesday, Chicago State had canceled spring break, moving up the end of the semester by several days to save money. Though the school has struggled with financial mismanagement in the past, Applegate said the budget stalemate had put the school in a dire situation.

Chicago State is scheduled for a visit from its regional accreditor in early March, Applegate said. Universities can lose their accreditation, which could take years to get back, if they are unable to show that they have the resources needed to provide students a quality education.

“Chicago State has been my home,” said Martin, the CSU senior, who was enrolled in summer and after-school programs at the university while in grammar school. “My mother was a single parent, and to make sure I stayed out of trouble she put me in these programs, so this place really has been a second home. I’m advocating for a home for the next young man, the next young woman.”

Want to learn more about state disinvestment in higher education? Check out: